BSA 2010 Piracy Report: It's Back And It's Just As Wrong As Before

from the not-this-again dept

Every May, the BSA puts out its "Bogus Stats Again" report claiming to analyze the "software piracy" issue. And, every year we and many other blogs and reporters debunk the study as being so incredibly misleading (unless you're News.com, I guess, and then you just act like a PR distributor and basically repost the BSA's press release as if it's accurate -- reporting is hard). I was going to write up yet another post debunking it, but Glyn Moody did such an excellent job debunking it at Computerworld that we asked him if we could repost it here, and he agreed.

In the digital world, it seems, there are two certainties: that every year the Business Software Alliance will put out a report that claims huge amounts of software are being “stolen”; and that the methodology employed by that report is deeply flawed.

The commercial value of software piracy grew 14 percent globally last year to a record total of $58.8 billion, according to the 2010 BSA Global Software Piracy Study.

Just six years ago, the commercial value of the PC software that was being pirated in emerging economies accounted for less than a third of the world total. Last year, it accounted for more than half — $31.9 billion.

Notice that immediately we have the phrase “commercial value”; just in case you had any doubts what this might mean, it is explained in the methodology section:

The commercial value of pirated software is the value of unlicensed software installed in a given year, as if it had been sold in the market.

“As if it had been sold in the market”: this is, of course, a meaningless figure. The very reason that people pirate software in developing countries - the main focus of the BSA report - is that they cannot afford Western-level prices. So there is no way that pirated software could ever be converted to sales at those prices - it is economically impossible. Using it as a measure is pure fantasy.

A more sophisticated study would attempt to establish at what price people would actually choose to buy from dealers rather than other sources: then that could be used to calculate a realistic estimate of how much revenue is lost in developing countries. To do that, a good place to start would be the recently-publishedMedia Piracy in Emerging Economies, whose results can be summarised thus:

Based on three years of work by some thirty-five researchers, Media Piracy in Emerging Economies tells two overarching stories: one tracing the explosive growth of piracy as digital technologies became cheap and ubiquitous around the world, and another following the growth of industry lobbies that have reshaped laws and law enforcement around copyright protection. The report argues that these efforts have largely failed, and that the problem of piracy is better conceived as a failure of affordable access to media in legal markets.

Exactly the same forces are at work in the world of software: this is a market failure, not a failure of enforcement.

But even if the BSA report had attempted this more realistic analysis, it would still draw the wrong conclusions from its results. Summarised in a section called rather risibly “Anti-piracy equity” - as if Western holders of intellectual monopolies really cared about “equity” when it came to exploiting developing countries:

Reductions in software piracy produce widespread economic benefits. For example, the BSA-IDC Piracy Impact Study found in 2010 that reducing the global piracy rate for PC software by 10 percentage points — 2.5 points per year for four years — would create $142 billion in new economic activity globally by 2013 while adding nearly 500,000 new high-tech jobs and generating $32 billion in new tax revenues for governments. On average, more than 80 percent of these benefits would accrue to local economies.

One thing that is always omitted in these analyses is the fact that the money not paid for software licences does not disappear, but is almost certainly spent elsewhere in the economy (I doubt whether people are banking all these "savings" that they are not even aware of.) As a result, it too creates jobs, local revenues and taxes.

Put another way, if people had to pay for their unlicensed copies of software, they would need to find the money by reducing their expenditure in other sectors. So in looking at the possible benefit of moving people to licensed copies of software, it is also necessary to take into account the losses that would accrue by eliminating these other economic inputs.

Thus the BSA's hypocritical plea for “equity” - how equitable is it trying to extract a month's wages from someone for a copy of Windows whose marginal cost is close to zero, say? - simply doesn't stand up to scrutiny. Eradicating piracy won't generate “new economic activity globally”, nor will it generate new tax revenues for governments. Again, as I pointed out last year:

One important factor is that proprietary software is mainly produced by US companies. So moving to licensed software will tend to move profits and jobs out of local, non-US economies.

...

Another factor that would tend to exacerbate these problems is that software has generally had a higher profit margin than most other kinds of goods: this means any switching from buying non-software goods locally to buying licensed copies of software would reduce the amount represented by costs (because the price is fixed and profits are now higher). So even if these were mostly incurred locally, switching from unlicensed to licensed copies would still represent a net loss for the local economy.

Similarly, it is probably the case that those working in the IT industry earn more than those in other sectors of the economy, and so switching a given amount of money from industries with lower pay to IT, with its higher wages, would again reduce the overall number of jobs, not increase them, as the report claims.

So, as expected, this year's BSA report rehashes all its old errors, simply introducing even more unrealistic figures in an attempt to frighten governments into even more disproportionate and unjustified attempts to enforce intellectual monopolies.

But to be fair, the 2010 report does sport one novelty:

this year’s study also adds a new dimension: Deeper and richer surveys of PC users in 32 countries, conducted by Ipsos Public Affairs, one of the world’s leading public-opinion research firms.

Here's the context to the first questions:

“The laws that give someone who invents a new product or technology the right to decide how it is sold are called intellectual property rights. Which comes closer to your view...”

Two options were then presented:

“Intellectual property rights benefit people like me by creating jobs and improving the economy.”

or

“Intellectual property rights hurt people like me by making products I need too expensive.”

Notice how this is framed in terms of “rights” - the word is used twice. This is a biased term, of course - it suggests that it is “right” to have that right. But really the question should have been:

“The laws that give someone who invents a new product or technology a monopoly on how it is sold are called intellectual monopoly rights. Which comes closer to your view...”

Similarly, the questions already bias the response by hammering home the idea that these are “rights”. Reframing the questions as

“Intellectual monopolies benefit people like me by creating jobs and improving the economy.”

or

“Intellectual monopnolies hurt people like me by making products I need too expensive.”

might well have produced results less favourable to the report's position. Nonetheless, it's interesting that only 61% thought intellectual monopolies benefitted ordinary people, while 37% thought they harmed them - hardly a resounding vote of confidence.

“Intellectual property rights concentrate wealth in the hands of multinational companies that do not deliver significant local economic benefits.”

Here, there was even more scepticism about the benefits - only 59% agreed with the first, while 40% chose the second option. Imagine what the results would have been had they been phrased thus:

“Intellectual monopolies allow companies to generate profits which in turn benefit local economies.”

or

“Intellectual monopolies concentrate wealth in the hands of multinational companies that do not deliver significant local economic benefits.”

Here's a third set of alternatives:

“It is important for people who invent new products or technologies to be paid for them, because it creates an incentive for people to produce more innovations. That is good for society because it drives technological progress and economic growth.”

or

“No company or individual should be allowed to control a product or technology that could benefit the rest of society. Laws like that limit the free flow of ideas, stifle innovation, and give too much power to too few people.”

Of course, the first question is loaded: who doesn't think that it's important for people who create new products or technologies should be paid for them? No wonder 79% chose this option. But that's not the issue: the issue is whether Western companies can charge unrealistic prices for their products in developing countries - prices that are literally unaffordable by the majority of the population there - and expect them to be enforced by local governments against the interests of their citizens.

Despite the bias of these questions, it is, however, interesting that BSA is trying to bolster its case with this supposed support for monopoly-friendly policies from ordinary citizens. It suggests that it knows that the days of its old approach - claiming implausibly large damage to economies based on flawed methodologies - are numbered, and that it must find an alternative soon. Otherwise we may have to forgo the pleasure of reading those entertaining annual reports...

Software

If you cruise the forums and magazines you will either find offers of the last edition given away free in the hope that at some stage you will fork out for the latest model or freeware alternatives which will do what the majority of simple folk want and even promotional free offers of the real deal

All you need to look at are the lack of cited sources for their data points. Their entire source is their own study from May 2010, but they make references to predictions for 2011 and beyond, as well as 2010 (which was only 5 months in at the time.) That isn't possible without time travel.

If they have such a strong claim then multiple sources should be able to point to the same (or similar) data points that they make. Not only does their own study not use external sources, but no other news source points to anything remotely close to the BSA's own numbers.

It certainly is an amusing PDF to keep around and print out for the future, however, it's something I'd like to show my grandchildren.

"$142 billion in new economic activity globally by 2013 while adding nearly 500,000 high tech jobs..."

As we are talking about the developing world, we should consider the ratio of money to generated job. The BSA is promoting the idea that you *need* 142 billion to add 500K jobs. 142 billion divided by 500 thousand is roughly 284,000 dollars per job. In the developing world, a job can be created for far less money.

Here in this example, 50 million produced 165K jobs, i.e. each job required 303 dollars to create.

Using BSA's own techniques to estimate job creation, only doing so from a developing country's perspective, the elimination of piracy would create 500 thousand high tech jobs in the developed world by eliminating 469 million jobs!!

So all we have to do is convince the developing world to let us eliminate half a billion jobs in the name of economic growth? That for every thousand jobs we kill in their country, we can create one job for a high tech worker in ours?

What a deal! I can imagine why the developing world hasn't already signed right up!

Re: In the digital world, it seems, there are two certainties:

Let's get the facts right

I commented on Mr. Moody’s original article at ComputerWorld UK, but it bears repeating here. I encourage everyone to visit www.bsa.org/globalstudy to see the study for themselves.

There are indeed certainties in life: the changing seasons, death, taxes… and every year we can count on an erroneous piece from Mr. Moody criticizing BSA’s study. This year, he bases much of his criticism on the assertion that the commercial value figures included in our study are derived from “Western-level prices.” In fact, this is not true. The commercial value of software theft is determined by assessing the prices of all different types of software available in each country and at local prices — retail prices, the cost of commercial licenses, the prices software companies charge local vendors and computer manufacturers, etc. Prices vary significantly from market to market because software companies have lowered their prices in emerging economies. (Unfortunately they haven’t seen a corresponding reduction in the level of piracy.) The BSA Piracy Rate fully incorporates those local market prices for each of the 111 countries we study.

Mr. Moody also leans on the idea it will cost someone a “month’s wages” for a copy of Windows. This ignores entirely the massive issue of enterprise software theft. Businesses in booming economies like China and Brazil and Indonesia are stealing software — a tool of production — and using it to compete in the global economy. Companies in China and other fast growing economies are investing in sophisticated robotics to manufacture products and cutting edge IT systems to process data. To say cost is the driving factor for them to steal software shows a clear misunderstanding the problem.

While we at BSA don’t expect Mr. Moody to agree with us on the issues, we would appreciate it if he and other critics would at take the time to better understand our research and avoid mistakes like those on display in this column.

Re: Let's get the facts right

If I may, I'll cross-post my reply.

Thanks for your comments.

I wrote “Western-level prices”, not “Western prices”. The issue here is that the pricing of software in emerging economies is not radically different from that in the West. For example, when Windows 7 was launched in China, the price for the Home Premium edition was RMB699, about $100, whereas the US price was $149.

You mention enterprise use of software, but the same applies here. Few US companies would be willing or able to pay $600 for every copy of Windows 7 (less, of course, with discounts, but still around this figure), so it's no surprise that Chinese companies don't either.

If the pricing of products around the world were closer to their Western levels taking these huge disparities into account, pirated copies would undoubtedly prove less attractive, because authorised copies would be both affordable and perceived as fairly priced – that “equity” thing.

They would be more attractive not least because, as your report says, unauthorised copies frequently have security issues through lack of updates etc. So in fact, it could be argued that the widespread use of unauthorised copies is beneficial to the West, since companies in emerging economies must spend far more time dealing with viruses, Blue Screens of Death etc., all of which *lowers* their competitivity.

Moreover, whatever the “real” figure for the financial impact of software piracy, it does not harm the local economies in the way the report stated, for the reasons I gave, and may well benefit them.

Re: Let's get the facts right

It would take a much longer post to unpack everything weird or wrong with this characterization of IP rights, beginning with the notion that remuneration of creators and social benefits are opposed. As usual, I don’t have enough patience to try and, as usual, BSA hasn’t released enough data to make these results particularly credible or worth the trouble from a research perspective. But the general agenda here is worth comment: like most of the other industry groups, BSA is very invested in proving that majorities of people approve of IP rights. This feeds into a larger industry belief that, in the long term, the problem of piracy is one of cultivating respect for IP and, relatedly, demonstrating popular support for stronger enforcement measures. Our view is that this notional ‘respect for IP’ is irrelevant in the face of (1) basic disconnects between high prices for media goods and low incomes, especially in developing countries, and (2) the ongoing rapid decline in the cost of digital technologies (that permit widespread copying, that need software, that facilitate music listening, and so on). The difference between what people think, in the abstract, about remunerating creators and what they actually do (reflecting issues of price and accessibility) begins to be better reflected in the BSA piracy rates chart…

And how about looking at the report Glyn Moody linked to?

The BSA’s annual estimate of losses to software piracy — US$51 billion in 2009 — dwarfs other industry estimates and has been an example of the commitment to big numbers in the face of obvious methodological problems regarding how losses are estimated.3 Widely circulating estimates of 750,000 US jobs lost and $200 billion in annual economic losses to piracy have proved similarly ungrounded, with origins in decades-old guesses about the total impact of piracy and counterfeiting (Sanchez 2008; GAO 2010).4

[...]

Our reservations about measurement extend to the BSA’s comparatively robust model of “rates” of piracy, which underpins the organization’s very precise claims about changes in levels of piracy from one year to the next. The BSA studies rely on the relatively small and stable (and therefore predictable) number of packaged software applications installed on an average computer—what it calls “average software load,” or ASL. ASL allows the BSA to estimate the total installed software base in a country and to compare that number to legal sales. The difference between the two is attributed to piracy. The model has no counterpart in music or film, where the size of personal libraries is subject to huge and growing variation. While solid in principle, however, the model is still very dependent on complicated inputs that the BSA’s research vendor, the IDC (International Data Corporation), does not share. Conflicting estimates of the size of retail markets, for example, are relatively common outside the United States and Europe, as is difficulty in establishing how many computers are in use in different countries. In the case of Russia, for example, where the BSA prominently cites a 16% decrease in the piracy rate between 2005 and 2009 as evidence of effective enforcement strategies, we were unable to independently reproduce those inputs.

[...]

Most studies now also translate such numbers into job losses. This practice was pioneered by the BSA in 2007 when it developed a formula for converting future decreases in the rate of piracy into anticipated job growth—numbers that it calculated per country in an attempt to promote stronger local commitments to enforcement. Using his own version of this approach, Siwek calculated that global piracy cost the United States some 373,000 jobs in 2005 alone. Putting the Siwek method to work in the European Union in 2010, an ICC-funded study projected a cumulative loss due to piracy of between 611,000 and 1,217,000 jobs in Europe between 2008 and 2015 (BASCAP/TERA Consultants 2010).

Studies of economic effects are important but raise serious methodological challenges, of which we will highlight two:

• the difficulty of determining the substitution effects associated with piracy—that is, the likelihood that a pirated copy substitutes for a legal sale—and the importance of the price/income effects in that determination; and
• the importance of the countervailing benefits of piracy to both industry and consumers in any model of total economic impact and, consequently, the importance of treating piracy as part of the economy rather than simply as a drain on it.

Although a variety of studies now model substitution effects,14 we are aware of only one that has attempted to model countervailing benefits: “Ups and Downs: Economic and Cultural Effects of File Sharing on Music, Film, and Games” (Huygen et al. 2009), commissioned by the Dutch government. Among the industry studies, all now acknowledge that substitution rates are less than one, but none offer any account or even acknowledgment of countervailing benefits. Consistently, they model only one side of the market—the industry losses but not the corresponding consumer surplus.

[...]

The BSA position is often described as a claim of one-to-one correspondence because it calculates losses (or, beginning in 2010, what it calls the “commercial value of unlicensed software”) by multiplying the estimated number of pirated copies of tracked products by a “blended average price” of those products across the different distribution channels (retail, volume licensing, “free” open-source distribution, and so on). Although functionally one-to-one, the BSA insists that its reasoning is more complex and reflects the assumption that although less piracy would not directly produce an equivalent increase in sales, it would do so indirectly by expanding economic activity, which would lead to increased sales. According to the BSA, “The two countervailing forces seem to cancel each other out” (BSA/IDC 2003).15 As recently as 2009, the IDC argued that this effect “might even underrepresent” true losses to the industry (BSA/IDC 2009). In practice, they offer no account of substitution effects and, consequently, no account of consumer behavior.